Sunday, September 10, 2017

% The Evil Percentage %

Language shapes our perceptions. It is almost impossible to express and develop ideas that are not expressible in language. To progress beyond limitations of current thinking, it would be necessary to move beyond current notations. Mathematical notations are one example of the how ideas can be developed further beyond the confines of current language.

There are also self-inflicted constraints that we impose on ourselves to restrict our thinking. Our value systems, our education, traditions, our sources of information bias us to think in a certain way.....

The evil percentage
The evil percentage

For years, I have been using Win % to evaluate the performance of trading systems. That is perhaps the most common way to indicate the Win-Loss Ratio. However, it is also terribly misleading to indicate Win-Loss Ratio with a Win % - at least to me. Nowadays, I always translate the % into a ratio, and that helps me a lot.

Here are a couple of posts that I had earlier posted in the Bakwaas Trading thread of the Traderji forum.

The importance of the win rate

I am treating this thread more like a scratchpad... So, I am putting out another of my half-baked thoughts here.

For the purpose of this post, I am ignoring Risk-Reward Ratio, which everyone knows is a very important factor in determining a trader's happiness.

Let's say that there are 2 systems - the first has a win rate of 49% and the second has a win rate of 51%. A 2% difference in win rate is not much.

But if you think about it, the first system will win 0.961 times for every loss. The second system will win 1.041 times for every loss. The values calculated as win%/loss% = win%/(100%-win%). So, the second system has a (1.041/0.961) = 1.083 better chance of producing a winner than the first system.....

Restating, a system with a 51% win rate is 8.3% better at producing winners that a system with a 49% win rate. Just a 2% difference in win rate gives me a 8.3% better chance at happiness :)

Take a system with a 45% win rate, and another with 50% win rate. The 50% win rate gives me a 22.2% better chance at happiness than the 45% win rate.


50% win rate --> gives 50% more happiness than --> 40% win rate
60% win rate --> gives 50% more happiness than --> 50% win rate
60% win rate --> gives 125% more happiness than --> 40% win rate
50% win rate --> gives 133.3% more happiness than --> 30% win rate
50% win rate --> gives 200% more happiness than --> 25% win rate
50% win rate --> gives 300% more happiness than --> 20% win rate
10% win rate --> gives 111.1% more happiness than --> 5% win rate
99% win rate --> gives 102% more happiness than --> 98% win rate

and finally,

100% win rate --> gives infinite times more happiness than --> 99% win rate

See... we have scientifically proven that trader's nirvana can be achieved by 100% win rate.

With a higher win rate, the chances of prolonged drawdowns reduces, and so does your blood pressure. With a 100% win rate, you could practically be dead.


Continuing my blabber from my previous post.... a casual look at win rate of 49% or 51% does not indicate that the impact between the 2 win rates could be more than 2%, like it actually is. Instead, would it have been better to state that the wins-to-loss ratio are 0.961 and 1.041 respectively?

Nowadays, for my trading systems - whether live or backtesting, I use the terms "plus" and "minus", instead of "win" and "loss". Even, when I use the terms "win' and "loss", like in the previous posts, internally I am translating them to mean "plus" and "minus". A "minus" does not give me the same feeling as a loss. It's not a defeat, it is just something that is expected in this business of trading, well anticipated after backtests and simulation. Similarly, a "plus" is not a win, a triumph. Unlike a "win", a "plus" is not going to give me a heady rush of adrenaline that wrecks my psychology. "plus/minus" keeps me calmer emotionally than "win/loss".

I am not very satisfied with the terms "plus" and "minus", but for now they will do - until I am able to expand my vocabulary, or ideate better. In George Orwell's book "1984", Big Brother's party invents Newspeak - a version of English with reduced vocabulary, concepts and rigid structure - just to prevent people from thinking anti-party thoughts. If you don't have the vocabulary to think thoughts, how will you think, communicate and take ideas forward?

So, here, I am trying my own Newspeak, just to get my thoughts and ideas in the right direction (though I am never sure about the direction being right). For now, I can think of viewing "win" rates differently, and "plus/minus"...

No comments:

Post a Comment